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Saturday, October 26, 2019 / 5.00PM / TheAnalyst/Header Image Credit: Proshare
GT Bank's
9 months 2019 financial results is a sweet pot of peppered soup. The
ingredients are a coloured mix of top line earnings decline, bottom line growth
and major cost of risk (CoR) deceleration. But the bank's service quality (a
qualitative assessment of the bank's retail activities) has sputtered to a slow
grind as its over-the-counter enquiry resolution mechanism has stayed sluggish
and sometimes frustrating, not only does the bank seem to have had a problem
with its time-to-service (queue management) processes, it also appears to be
struggling with its overwhelmed customer relationship desks.
Highlights
of GT's financials ending in September 2019 play up its increased retail market
penetration and its struggle with expanding credit without compromising loan
asset quality.
Highlights
Chart 1 GT Bank Top line Earnings Numbers 2015-2018
Source: GT Bank Annual Financial Statements 2015-2018
Chart 2 GT Bank
Bottom line Profit Numbers 2015-2018
Source: GT Bank Annual Financial Statements
2015-2018
Top line
worries
A recent
report by international consultancy firm, McKinsey Consulting, elaborates on
the challenges banks around the world are having coping with slow global
economic expansion and increasing pressure on the quality of risk assets in
respective countries. Compression of top line earnings of banks around the
world signpost a rise in business risk for financial service providers such as
deposit money banks (DMBs). According to McKinsey's researchers in a report
they recently titled 'The Last Pit Stop? Time For Bold Late-Cycle Moves',
they noted that, "A decade on from the global financial crisis, signs that
the banking industry has entered the late phase of the economic cycle are
clear: growth in volumes and top-line revenues is slowing with loan growth of
just four percent in 2018-the lowest in the past five years and a good 150
basis points below nominal GDP growth. Yield curves are also flattening. And,
though valuations fluctuate, investor confidence in banks is weakening once
again."
The
authors point out that, "Global return on tangible equity (ROTE) has
flatlined at 10.5 percent, despite a small rise in rates in 2018. Emerging
market banks have seen ROTEs decline steeply, from 20 percent in 2013 to 14.1
percent in 2018, due largely to digital disruption that continues unabated.
Banks in developed markets have strengthened productivity and managed risk
costs, lifting ROTE from 6.8 percent to 8.9 percent. But on balance, the global
industry approaches the end of the cycle in less than ideal health with nearly
60 percent of banks printing returns below the cost of equity. A prolonged
economic slowdown with low or even negative interest rates could wreak further
havoc."
The
decline of economic activities in Nigeria (the economy grew by a modest +1.94% in Q2 2019) appears to have flatlined
income opportunities for local lending institutions, thus resulting in GT Bank's Gross Earnings between December 2018 and September 2019 sliding down by -3.17%. The dip may not
have significantly hurt the bank's bottom line but it certainly weakened what would,
otherwise, have been a stronger nine-month performance in 2019 (the bank's
topline gross earnings growth has been fairly modest over the last three
financial years (see chart 1 above), but its bottom line numbers
have been traditionally pacier (see chart 2 above)).
GT Bank's
chief executive officer (MD/CEO), Segun Agbaje, has repeatedly emphasized that
the bank was not in the race for revenue and asset size but in competition for
scaled overall business growth and underlying profitability (supposedly
reflected in the banks return on average equity, ROaE of 33.7% in
September 2019), and this seems to have been evidenced by the character of the
bank's 9 months 2019 income statement, where the bank's weaker topline revenue
still saw a marginal growth in its bottom line number, with profit after tax
rising from N142.2bn in December 2018 to N146.9bn in 9 months 2019,representing
a growth of +3.35%.
Both
Interest Income and Interest Expense dipped during the year, but net Interest
Expense fell far steeper (-23.39%) than Net
Interest Income (-5.62%), leaving the bank's Net
Interest Income growth rate slightly positive at +0.75%.
The faster falling Interest Expense relative to its Interest Income suggests
that GT has strategically pushed down borrowing costs as it expanded its deposits
from customers (customers deposits grew by +5.13%
between December 2018 and September 2019). The growth in deposits at lower
costs raise interesting issues of loan to deposit (LDR) growth and bank
liquidity.
Flush with Liquidity, Skinny on Bankable Assets; The New Hobbesian
Dilemma
The CBN's
recent policy guideline on lending requires banks to lend at least 65% of their
deposits to individuals and businesses that have bankable proposals. The rise
in the LDR means that banks rather than pay a fine of 50% of the difference
between their required lending and
actual lending, would prefer to create new credit assets at lower interest
rates, but are finding this difficult with the economy growing at such a slow
pace; new bankable businesses are getting tougher to uncover. The inability to easily translate
deposits into loans has become local banker's new Hobbesian dilemma; they are
damned if they don't and damned if they do.
Between December 2018 and September 2019 GT Bank's loans and advances grew by +9.44% ahead of the +5.13% advance in its deposits but less than the rate required to meet the CBN's previous 60% loan to deposit ratio (LDR) requirement, thereby resulting in a penalty of N25bn (see chart 3 below).
Chart 3 CBN Debits to Banks in
Default of 60% LDR Requirement Sept. 2019
Source: Central Bank of Nigeria (CBN)
Since the
debits by the CBN will go into increasing banks cash reserve requirements (CRR),
banks with large debits will suffer margin squeezes as they are compelled to
place their cash in assets that earn zero interest rates as against the risk -free
rate of between 13 and 15% earned on T-bills.
Short Selling for Profit
A further
notable aspect of the business activity of GT Bank over the first 9 months of
the year has been its busy trading in Treasury bills on margin. The heavy
T-bill activity is reflected in the spike in its liability line item for short
T-bill transactions which rose from N1.76 bn in December 2018 to N5.62 bn in
September 2019, a rise of about 219%.
Bolstering
income further was the noticeable rise in fee and commission income from
N40.35bn in September 2018 to N48.38bn in September 2019, a growth of +19.90%. A large part of the increase in this Income
Statement Item was the result of a +37.18% rise
in credit-related fees and commissions from N5.89bn in September 2018 to
N8.08bn in September 2019. In addition, the bank grew its E-business income
from N6.77bn in the first 9 months of 2018 to N11.04bn in the 9 months ending
September 2019, or what amounted to a rise of +63.07%
on its E-business earnings. Growth also came from FX commissions which rose
from N4.68bn in the first 9 months of 2018 to N5.45bn in the first three
quarters of 2019, a rise of +16.45%. GT also
made strong commissions for touchpoint services which grew from N914.87m in 9
months of 2018 to N1.35bn in the first ninth months of 2019, representing a +47.70% rise in touchpoint income growth.
Bearish
on Derivatives
The bank
may have been bullish on Treasury short sells but it was bearish on derivative
instruments as derivative liabilities fell from N3.75bn in September 2018 to
N1.67bn in September 2019, a fall of -55.47%.
Loan Impairments Without IFRS9 Adjustments
Adjustments
for the International Financial Reporting Standard (IFRS) 9 rules concerning
treatment of non-performing assets provision showed up strongly in the bank's 9
months 2019 performance, with impairment charges reversing from a day-one
adjusted write-back of N295.2m in September 2018 to a charge-off
of N575.61m in September 2019. This obviously indicates that the bank will need
to accommodate larger write-off figures by year end 2019 compared to full year
2018 when the bank was allowed to remodel impairment to the previous year
(2017) level for the first year of IFRS9 accounting adjustment (or what was
called "day one" adjustment). Nevertheless, the bank's loan impairment charge
as a proportion of loans outstanding at 0.20% remains strong and healthy.
Getting Service Delivery Right
From its
financials in 9 months 2019, GT Bank had a modest performance in terms of
profit growth, but showed a tapering of its topline performance. Notionally,
customers of the bank have complained about a decline in the quality of the
bank's service delivery which seems to be the result of a sudden surge in its
retail service base as banking customers took a flight to safety post banking
meltdown between 2016 and 2016. The rise in the number of the bank's customers
has put severe pressure on operations.
However,
the banks Unstructured Supplementary Service Data (USSD) remains one of the
best-in-class and has relieved some of the early frustrations of customers as
the banks Automated Teller Machines (ATMs) have also been majorly functional
with short cash dispensing cycles.
Like
other banks GT Bank's principal challenge in Q4 may likely be how to meet the
CBN's 65% LDR requirement without hurting its NPL to Loans ratio. In the
context of a local Nigerian adage, "The bigger the head, the bigger the
headache", few envy bankers at times like this.
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